Introduction

This Fact File gives a detailed look at renewable energy certificates (REC). A REC is a tradable certificate that represents the generation of 1 megawatt-hour (MWh) of electricity from a renewable energy source. Wind, solar, geothermal, biomass, and some low impact hydropower facilities are used to generate RECs. RECs are individually identified, tracked, and sold to substitute as renewable energy for consumers that may not have the means to produce their own, and in some cases are legally required to have a specific amount of renewable energy in their portfolio.

Background

“Green electricity” is electrical power created through renewable sources and is split into two types of revenue; the physical energy created and the green energy as measured by RECs. Originally, RECs were only used to measure mandated renewable energy generation for electric utility company compliance. Utility companies have to comply with legislated quotas as part of the Renewable Portfolio Standards (RPS).

In addition to legislative mandated compliance with RPSs, other energy consumers can voluntarily purchase RECs. This includes residential and commercial consumers. They’re effectively buying energy credits from renewable energy generators, such as wind or solar energy generators, as opposed to fossil fuel-fed generators. RECs for compliance typically have to be purchased within their jurisdiction, often through environmental commodity brokers. However, voluntary RECs can be purchased from any entity, while it is still recommended they be purchased locally. In addition, some states have multiple classes of RECs, which have their own requirements.

REC purchase options — Unbundled RECs

Unbundled RECs are a versatile but standalone REC product. This type is purchased separately from a consumer’s actual electricity use and is often purchased from providers outside their own power grid. Companies that take this route can still claim all the attributes of the energy type such as “50% energy for this process is provided by renewable sources.” This option is helpful when there are high costs or limited options for producing renewable energy in a particular area and the consumer has greater flexibility in where the RECs are purchased from.

Consumers buying unbundled REC products are provided significant flexibility in the types of energy they purchase and can buy RECs in low quantities or match their entire use. Unfortunately, the unbundled RECs are not tied to a purchaser’s specific energy consumption. Because of this, consumers do not see any of the monetary savings of energy cost fluctuations as they’re still paying for energy use on top of the initial cost of the RECs.

REC purchase options — Utility retail options

Energy consumers may have the option to purchase green electricity from their local utility company. This helps the utility company invest more in renewable energy sources and they can bundle the RECs with the consumer’s monthly bill. Typically, consumers have the option to purchase either a block of RECs or a percentage of their monthly use. Larger consumers may have the option to have a green tariff arrangement for longer and more complicated contracts.

REC purchase options — Community Choice Aggregation (CCA)

A CCA allows local governments to aggregate electricity demand within their jurisdictions which allows them to contract for additional electrical supplies from other sources, such as renewable energy to serve that demand. Not all states allow CCAs. Local governments periodically reevaluate CCAs for their cost versus benefit, so the continued availability of CCAs in the long-term is often unknown.

REC purchase options — Direct purchase options

Depending on the state, some organizations can contract with a specific third-party owned generator to obtain green power. This includes physical power purchase agreements (PPAs) and financial (also known as virtual) PPAs.

Physical PPAs contracts cover the price, delivery schedule, and transfer of the RECs. This contract is between the renewable energy creator and the company utilizing the RECs, both located within the same power market. These are especially beneficial when overall utility prices increase and the RECs keep the prices steady, allowing for long term savings for the purchaser. Financial PPAs are used when the energy is not directly delivered to the buyer like a physical PPA. This is a long-term contract where the settlement agreement price is based on the regional wholesale market price. This allows for the PPA buyer to be in a different market than where the energy is physically generated and may allow for stability in energy prices for the buyer.

REC purchase options — Self-generation options

In addition to purchasing RECs, companies can also produce their own power, either on-site or off. Self-generation of power can come from solar power, wind power, fuel cells, and electricity storage that use renewable fuels. Some large facilities sited near landfills or sewage treatment plants may be able to use captured methane gas for on-site electricity and/or heat production. Typically, the power generated on-site is sold back to the local power grid through net monitoring.

Applicable law & regulations

State specific Renewable Portfolio Standards (RPS)

Related definitions

“Renewable energy certificate” is a tradeable, market-based instrument that represents the legal property rights to the “renewable-ness” (or all non-power attributes) of renewable electricity generation.

“Green power” is a subset of renewable energy, representing renewable energy resources and technologies providing the highest environmental benefit by reducing the emissions associated with traditional electricity sources.

Key to remember

Purchasing RECs is a way to utilize green power when creating it on-site may be too costly or impractical. They can reduce your environmental impact and you can exclusively claim the attributes of that energy.

RECs are not the same as environmental offsets. While both are part of green power and represent the benefits of mitigating greenhouse gas emissions, they represent different sides of the spectrum. Offsets are a metric ton of emissions that has been avoided or reduced; RECs represent attributes of 1 MWh of renewable electricity generated. You don’t offset your usage with a REC, but rather, match your usage with RECs.

Real world example

An international computer search engine company has committed to being carbon neutral with their massive power consumption. To accomplish this the company purchased 48 megawatts (MW) of wind energy from the Grand River Dam Authority (GRDA) and up to 407 MW of wind from MidAmerican Energy for the operation of two data centers in the Midwest. The company doesn’t purchase the energy directly from the wind farm or the utilities that enter into PPAs with local wind farms. Instead, the computer company entered a long-term purchase agreement with the utilities — essentially, a PPA within a PPA, otherwise known as a sleeve contract. By working this way, the responsibility for maintaining the output from the wind farms lies with the utility company. While still paying a premium for the renewable energy used, this agreement structure reduces liability for the computer company and allows them to maintain a renewable energy profile.